The anointing of a rival bidder by research houses means Pulpwood Plantations is an outsider to secure the necessary votes this week to take over Great Southern timber schemes.
TWO entrants in the three-horse race to take control of Great Southern’s timber schemes have had their legs taken from under them, leaving one runner out in front.
One person close to the bidding process told WA Business News that: “Pulpwood is in trouble, Gunns is the favourite and Black Tree is hoping that the rivals fail and it gets the 11th hour ‘oh crap’ vote.”
The three players have spent hundreds of thousands of dollars preparing their proposals, with Pulpwood the first to put its proposal to a vote this week.
Late on Tuesday, Pulpwood conceded defeat by sending a note to investors declaring the level of proxy support meant its proposal would not be accepted at the meeting. Pulpwood wanted to warn against investors travelling to the Perth meeting.
All proposals face the high hurdle of needing 50 per cent worth of votes to take over the timber schemes.
Great Southern operated 45 forestry, horticulture and cattle managed investment schemes on behalf of 43,000 investors, however the bulk of money, investors and public interest, is in the flagship timber schemes.
Pulpwood Plantations, the bidding company headed by local industrialist and university chancellor Gordon Martin, was first out of the gate and won some early public admiration by publicly releasing the details of its bid.
Backed by some well-known names, including the former soccer club owner and fast food magnate Nick Tana and former Great Southern executive director Phillip Butlin, Pulpwood’s proposal enjoys widespread credibility.
Pulpwood took a somewhat confrontational approach to Great Southern receiver McGrathNicol by working off its own timeline to take control of the schemes, rather than working closely with the receiver.
This decision by McGrathNicol to choose Gunns as its preferred candidate didn’t surprise Mr Martin.
“Effectively what they’ve done is they’ve reached an agreement which gets rid of some problems for the receiver and gets rid of some of the encumbrances on the land and the legal issues which cost the grower,” Mr Martin said late last month.
Mr Martin’s comments summarise a long-held investor fear about the actions of the receiver, as McGrathNicol was appointed by a banking consortium to look after its multi-million dollar creditor interests.
McGrathNicol has consistently declined to engage in discussion with WA Business News to discuss the bidding process, and instead employed public relations representatives in Sydney to field questions.
The major secured lenders are Commonwealth Bank and ANZ.
While the bank creditors hold mortgages over the land on which the trees are planted, investors, who are often referred to as ‘growers’, own the trees. The plantations are, therefore, an encumbrance, which means the banks can’t just put the ‘for sale’ sign up and retrieve their money.
Potential buyers of the land would demand a discount that increases the further the trees are from being harvested.
One of the more controversial parts of the Gunns proposal is that it has sold a second rotation right – the potential for investors to grow more trees on the land after harvest – for a rent reduction on the land.
The bank creditors would prefer this because it takes away the encumbrance. But it is questionable whether it is in the best interest of investors.
Another significant difference between the bidders is that the Gunns proposal includes a change of constitution that would lower the hurdle for the responsible entity to make changes to the schemes in the future.
Pulpwood could have conceivably fought a successful fight against the receiver-recommended Gunns by attracting popular investor support. But then a series of research reports stopped Mr Martin’s charge.
Research house Adviser Edge was among the researchers to recommend the Gunns proposal over that of Pulpwood.
“In the absence of a superior proposal emerging and subject to investors forming their own view with respect to the enforceability of their rights in relation to the second rotation crop, Adviser Edge believes that the Gunns proposal is the superior proposal,” a research paper obtained by WA Business News says.
Adviser Edge referred to Gunns’ established presence in the forest products market, strong track record and cheaper fee model for its recommendation.
It is understood that research houses Lonsec and Australian Agribusiness Group have expressed similar views.
The Gunns proposal also includes more schemes than Pulpwood’s.
One observer noted that for a group trying to attract support days out from a vote – December 10 – Pulpwood is very quiet. As thousands of people aren’t expected to descend upon the meeting to vote, Pulpwood already knows through the proxy system whether it stands a chance.
While investors in the schemes may not regard research houses that highly – as several gave schemes run by Great Southern high ratings – the analysis is sure to affect the decision of financial planners advising their clients.
Gunns was the last group to publicly declare its intention to bid for the timber schemes and, after working closely with the receiver, it ultimately won support from McGrathNicol.
The Tasmanian forest products heavyweight can now rely upon up to 30 per cent worth of votes controlled by the receiver – resulting from Great Southern’s controversial Project Transform – for the schemes being thrown in its direction.
This is a huge leg up for a bid requiring 50 per cent, and a huge hurdle for rivals. When you take the 30 per cent away from rivals, they must garner 70 per cent of all other votes to reach the required mark.
Throw in any investor apathy and the hurdle is sky-high. It is understood that, after the Pulpwood bid, adviser groups may make their own recommendation between Gunns and Black Tree to prevent the votes being split.
The vote on the Gunns proposal, which relies on an unsuccessful Pulpwood vote, is scheduled for December 23.
Gunns’ fee structure is very similar to the one proposed by Pulpwood, although it is slightly lower. In fact, there are several similarities between the bids.
One observer noted that some of the proposal appears to be “copy and pasted” from Pulpwood’s bid – a charge Gunns strongly denies.
One way or the other, Gunns has undercut Pulpwood and attracted the support of the receiver and research houses alike.
It argues that by exchanging the second rotation right for a rent reduction it has locked in value that might otherwise be lost. It’s generally understood that the banks could mount a legal challenge to the rotation, and after all the drama of the Great Southern collapse it’s debatable whether investors would throw more money into another scheme or legal stoush.
Yet it has been estimated that the value of the second rotation is between $150 million and $200 million, which is far more than the rent reduction is worth.
Black Tree
Despite repeated calls for Black Tree to go public on its proposal, the group headed by local forestry veteran Tony Jack stuck to the receiver’s time line. Adviser representatives told WA Business News the group assured stakeholders it had sewn up support from the receiver.
Like Pulpwood, Black Tree has some high-profile backers, including corporate advisory firm Azure Capital.
But it was caught completely off guard by McGrathNicol’s announcement late last month that the receiver was supporting Gunns. Black Tree didn’t have a responsible entity lined up, or the 5 per cent investor support to call a meeting.
Black Tree is now attempting to get the support together and paperwork in order to call a meeting for early next year.
Mr Jack accused McGrathNicol of using his bid to find a better deal for the bank creditors at the expense of out-of-pocket investors.
“Our faith in the [McGrathNicol] process was misguided. It is now obvious that [McGrathNicol] were simply using Black Tree to bide time to find a better solution for the Great Southern secured banks which had installed [McGrathNicol] into its position as receiver,” a letter sent to investors signed by Mr Jack said.
To make matters worse, the corporate regulator found that Black Tree’s rough proposal – its official one won’t come out until a meeting is called – may have contained inappropriate projections.
The projections contained in the letter included graphs showing investors far better off under Black Tree’s plan. Mr Jack is losing valuable time as he redraws the proposal, and the slip off will cost some credibility in the marketplace.
Using Black Tree’s old proposal, the group is planning to use what can be described as a cost-plus structure, as opposed to the end percentage fee proposed by rivals.
Black Tree is also proposing to pool projects into a single forestry estate, which differs to the scheme arrangement proposed by the other bidders.
Mr Jack must now rely upon investors voting down proposals from Pulpwood and Gunns to stay in the running.
It is understood Adviser Edge is about to release a report comparing Gunns and Black Tree and should the research suggest Black Tree’s proposal is better there may be enough of a split to vote down Gunns.
Facing the possibility of having all the schemes wound up due to the lack of a successful bid, the ‘oh crap’ vote could really come into play for Black Tree.
